ECB to take center stage

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  • Attention turns to another potentially devastating storm, Hurricane Irma.

  • No policy shift expected from the ECB today.

Concerns over North Korea and Hurricane Irma, one of the most powerful Atlantic storms yet, lingered on Wednesday. Irma may make landfall in Florida on Sunday and could cause significant damage just days after Hurricane Harvey left great devastation along the US Gulf coast. The prospect of two significant hurricanes in close succession has been weighing on insurance stocks, with the financials sector of the Stoxx 600 one of the worst performers on Wednesday. Despite the uncertainties, European equity markets managed to reverse losses by the close, ahead of today’s meeting of the European Central Bank (ECB). Oil gained ground, as US refineries that had been taken offline as a result of Harvey were restarting operations, creating more demand for crude oil. Meanwhile, gold continued to trade near a one-year high.

USD weakens amid questions regarding the path of interest rates

The USD continued to soften following comments on Tuesday by Federal Reserve (Fed) governor Lael Brainard, who cautioned about tightening monetary policy further before inflation is on track to achieve the Fed’s target. The comments helped diminish expectations for another tightening step by the Fed this year, with the market-implied probability of a hike in December down to around 25%. The Fed made news separately, as vice chairman Stanley Fisher announced his resignation, effective mid-October.

EUR may benefit from dovish ECB

Staying with central banks, the key event coming up today is the ECB policy meeting, with a press conference scheduled to take place in the early afternoon. As we noted in prior issues of this publication, since ECB president Mario Draghi gave no hints regarding the monetary policy outlook in his speeches last month, our view remains that the ECB will only in October or even December announce how it plans to scale back its asset purchases (“tapering”) next year. In this context, the recent strength of the EUR requires a careful communication strategy as the ECB approaches the tapering decision. As for the EUR, it may well be temporarily supported even if the ECB remains vague about its tapering plans but at the same time refrains from making a strong statement on the EUR’s rise. For EUR gains beyond USD 1.20/1.22 to hold more sustainably, European vs. US rate spreads, still stable for now, would need to rise. Yet this would probably happen only if tapering was not only announced, but if the ECB guided for faster or larger-than-anticipated tapering.

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